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Visualizing the ‘Great Decoupling’

Reuters/Jonathan Ernst

By Michael Rainey

November 1, 2018

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The Washington Post’s Catherine Rampell asked economist and data visualization specialist Jonathan Schwabish of the Urban Institute to create a chart that shows how unusual the large and growing budget deficits are in the context of strong economic growth.

“[B]udget deficits and the business cycle have historically moved in tandem,” Rampell writes. “When unemployment is low, deficits typically shrink, or even become surpluses. After all, when the economy is good, people tend to earn more money and pay more in taxes — and also require fewer safety-net services such as food stamps. The reverse happens when the economy is bad.”

But budget deficit appears to have decoupled from the business cycle, Rampell says, and that trend will grow more pronounced as revenues remain well below spending in the wake of the Republican tax cuts that went into effect this year.

Schwabish’s chart below shows the relationship between the unemployment rate and the size of the deficit (or surplus) relative to GDP since 1948, with each year represented by one dot. The recession years are in orange in the lower right corner, reflecting high unemployment and large deficits, although still on the trend line that stretches down to the right. By contrast, projections for the next 10 years in light blue are clustered to the left, off the trend line, indicating high deficits even as unemployment rates remain low.